Local Investing – Creating A Sustainable Local Economy

Much like the slow food movement that focuses on food quality and nurturing a sustainable and resilient food system, there is also a “slow money” movement focused on creating a community that is healthy, sustainable and equitable – based on a local economy that is strong and resilient. And much like the slow food movement that is reconnecting eaters with farmers, we need to connect local investors with local entrepreneurs and business owners.

As Michael Shuman points out in his 2012 book “Local Dollars-Local Sense,” “locally owned businesses are the real pillars of a prosperous, sustainable economy. A growing body of evidence suggests that every dollar spent at a locally owned business generates two to four times more economic benefit—measured in income, wealth, jobs, and tax revenue—than a dollar spent at a globally owned business. That’s because locally owned businesses spend more of their money locally and thereby pump up the so-called economic multiplier”.

The dominant financial system that has developed over the last fifty years is not working to support this vision of locally vibrant and economically resilient communities and undermines the efficient use of capital for new business startups and, most importantly, local investment. Global capital markets are draining, not enhancing the economic health of our communities. The current system is based on continuous growth while concentrating power and wealth in global financial centers unconnected to our daily lives and the concerns and aspirations of those of us who provide much of the source for this wealth.

According to a January 13, 2015 article published by Gallup, the U.S. now ranks not first or second “but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America”.

The fact is for the first time since they started collecting the data; American business closings now outnumber new startups. This isn’t a Republican/Democrat issue; it is a structural shift in the way the capital markets work. Without new business growth, the free enterprise system and the jobs they support decline. We see it already with stagnant salaries, increased income inequality and declining tax revenues which put at risk all the social programs they support. Without growth and a vibrant entrepreneurial economy we put our entire economic and political system at risk.

Every day we make major life decisions. Where do we want to live? Who will we marry? Where will our children go to school? However, when it involves our savings and retirement funds, a major portion of our economic lives, we abdicate these decisions to the financial institutions.

To restore our communities’ economic foundation we must restructure the ways in which financial capital flows through our local economies. We can do this by tapping into the wealth that we have in our own communities, directing regional resources towards community-serving businesses and organizations that create real, long-term value and re-circulating this wealth for the benefit of the whole community.

According to Shuman, locally owned businesses currently generate half of the private economy, in terms of output and jobs. “Add in other locally-based institutions—nonprofits, co-ops, and the public sector—and we’re talking about 58 percent of all economic activity. So in a well-functioning financial system, we’d invest roughly 58 percent of our investment and retirement funds in locally based enterprises”.

Can you imagine the economic impact in our communities if even 10 or 15% of the $53 trillion in financial assets that are now managed by Wall Street was returned to Main Street – or, more specifically Front Street – to be invested in local businesses?

Yet local businesses receive very little of neither our financial savings nor do they have access to the capital from mutual, venture, or hedge funds. The result is that all of us, even those of us who are advocates of community development and local investing under invest in the local economy and overinvest in the global financial markets.

To begin to change this dynamic I don’t think it is unreasonable or imprudent to consider taking 10-15% of your investible assets and putting them to work in the local community. This is not as simple as it seems.

Today state and federal financial regulations place huge restrictions on the investment choices of small, “unaccredited” investors—a category in Securities and Exchange Commission vernacular that includes all but the richest two percent of Americans. The regulations prohibit the average American from investing in any small business, unless the business is willing to pay large sums on lawyers to prepare private placement memoranda or public offerings, a cost few new businesses can afford.

There are numerous efforts underway to change some of the more onerous aspects of these regulations both at the state and federal level. In fact, there are several investment groups in Traverse City that are actively pursuing opportunities to invest in local businesses.

One new group, Common Cents Capital, was formed out of a citizens group, As Local as Possible (aslocalaspossible.com), that meets monthly to hear from area business owners about their efforts to expand their businesses. They have pooled their funds to make loans available to local businesses.

Also active is Northern Michigan Angels (northernmichiganangelscom), a group I helped found whose mission is two-fold: to help grow the economic base of the region through the rapid growth of early-stage companies and to provide members a compelling financial return on their time commitment and invested capital. To date this group of accredited investors has invested more than $1.2 million in Michigan-based companies.

Financial capital is just one of many resources that we must harness to build and support sustainable local and regional economies. Talking about ways to “slow down” our money and become more connected to our investments is one important step in this direction.